Core ideas

The company's three major business segments each had highlights in 2024. The formulation pipeline expanded rapidly, and profitability continued to improve. The API business is resilient, and capacity building has led to increases. The CDMO project is growing well. Maintain a high level of R&D investment and build a perfect technology platform.

Looking ahead to 2025, we think we should pay attention to: 1) rich formulation pipelines driving growth; 2) CDMO: D-end and M end are making concerted efforts; 3) APIs: traditional business is steady. At the same time, the company has increased investment in emerging businesses such as medicine, aesthetics, and synthetic biology in the past two years, and is expected to gradually contribute to the increase in performance over the past 25 years. 4) Prices of veterinary drugs have bottomed out and rebounded. Currently, the pig cycle is picking up to a certain extent. Demand side veterinary drug usage is expected to rise marginally. Focus on the elasticity of veterinary drugs.

occurrences

The company obtained oseltamivir phosphate capsule drug registration certificate

On December 9, the company announced that its holding subsidiary Zhejiang Prokangyu Pharmaceutical Co., Ltd. received the “Drug Registration Certificate” for oseltamivir phosphate capsules issued by the State Drug Administration.

The domestic clinical hospital market size of oseltamivir phosphate capsules in 2023 was 0.3 billion capsules, with sales of 1.53 billion yuan.

Brief review

The API business is resilient, and the development momentum of formulations and CDMO is good

Formulation pipelines are rapidly expanding, and profitability continues to improve. The company adheres to the “good drug” strategy and develops superior varieties in the fields of anti-infection, cardiovascular, anti-tumor and psychotropic drugs. Benefiting from continuous investment and forward-looking layout in recent years, the company's formulation product pipeline has expanded rapidly. 24H2 has obtained 7 formulation approval numbers, including the antidepressant bupropion hydrochloride sustained-release tablets, the anti-infective drug levofloxacin tablets, injectable adenosylmethionine butadisulfonate and its enteric tablets for liver disease treatment, and oseltamivir phosphate capsules for anti-influenza virus drugs. Furthermore, since July, the company has approved two types of formulations in the US, namely metoprolol succinate sustained-release tablets for high blood pressure treatment and amantadine hydrochloride tablets for Parkinson's disease. In terms of formulation research and development, the company established the Hangzhou Prodrug Research Institute in Zhejiang. Currently, there are more than 30 research projects. As the R&D pipeline is gradually approved for listing, the formulation sector is expected to usher in accelerated development. At the same time, the gross margin of 24Q1-3's pharmaceutical sector increased by nearly 10 pcts, mainly due to 1) significant increase in production efficiency and reduction in overall costs due to centralized production; 2) adjustment and optimization of sales models for some products. With the enrichment of subsequent formulation pipelines, we expect the scale effect to be further strengthened, driving a steady increase in the profitability of the formulation sector.

The API business is resilient, and capacity building has led to increases. The company's API intermediates sector is rich in products, involving anti-infective agents (cephalosporin series, penicillin series), psychotropic series, cardiovascular series, and veterinary drug API intermediates series. It remains strong and resilient in the context of facing challenges in the 2024 external environment and fierce competition in the industry. In terms of sector growth:

1) High-end production capacity API workshops 303 and 304 were completed and put into use in March '24. The two workshops invested 0.44 billion and used synthetic biology and chemical combination processes, leading traditional chemical synthesis processes. Continued increase in production capacity utilization will lead to performance release; 2) The medical and aesthetic business development trend is good. The company's current business already has more than 0.2 billion yuan in business related to medical and aesthetic raw materials. Currently, it has established cooperative relationships with some customer groups and passed audits by internationally renowned cosmetics companies. In terms of variety, the company will focus on cosmetic ingredients, beauty products, collagen, etc. in the short term, and will develop a layout in categories such as botulinum toxin in the long term.

3) Peptide business capacity construction in progress: In October '24, the company revealed that the peptide API workshop plans to invest 0.3 billion yuan, with a design capacity of 0.012-0.02 million litres. Currently, production capacity construction is in the design stage. On October 15, the company's simeglutide injection IND application was accepted by the CDE. It is expected that the relevant work will be completed before the patent expires, adding to the progress of the company's peptide production capacity, which is expected to contribute to medium- to long-term performance.

CDMO: The project growth trend is good. The company's CDMO division has three R&D centers, located in Boston, USA, Shanghai Pudong, China, and Hengdian, Zhejiang, China. It can provide customers with various types of R&D and preparation services including FT E and FFS. The number of CDM O R&D projects of 2024Q1-3 company accounted for 63.7%, and the number of commercialized projects accounted for 36.3%; R&D projects grew 57% year-on-year, and commercialization projects grew at a year-on-year rate of 33%, and R&D and commercialization projects showed good growth. Currently, the company continues to promote business transformation and upgrading from “original API+registered intermediate+API+ formulation”. In March '24, the company signed a strategic cooperation agreement with Shanghai Zhenge Biotech. The two sides will join forces to build a one-stop ADC CDMO service platform covering diverse antibodies, diverse small molecule toxins and linke r technology platforms to provide ADC pharmaceutical customers with more advantageous technology choices. As the company's CDM O capabilities are gradually upgraded and iterated, competitiveness continues to improve, and the number of service customers and projects is expected to continue to grow.

Maintain a high level of R&D investment and build a perfect technology platform. R&D activities in various sectors of the company remain active. 24Q1-3 has invested 0.467 billion in R&D, and the R&D cost rate exceeds 5%. At present, the company has established multiple technical platforms, which can provide comprehensive, professional, high-quality and efficient services for the company's three major businesses. The API Division and the CDMO Division have established fluid chemistry technology platforms, crystal and powder technology platforms, synthetic biology and enzyme catalysis technology platforms, peptide technology platforms, PROTAC technology platforms, and ADC technology platforms; the Formulation Division has established pellet controlled release technology platforms, microchip technology platforms, and dry suspension technology platforms. In April '24, the company announced the appointment of Dr. Dan iel Xu as the chief scientist of the peptide technology platform. In July '24, the company announced the appointment of Dr. Johannes Platzek as the chief scientist of CDM O's global innovative drug development and production service platform. Dr. Danie L Xu has been deeply involved in the peptide industry for more than 20 years and has outstanding capabilities in peptide pharmaceutical process development and large-scale production. Dr. Johannes Platzek has served Bayer for more than 30 years. He has participated in and led the development and commercial production of many new drugs, and has accumulated deep experience in route design, process optimization, and scale-up production. The construction of a technology platform and the introduction of outstanding talents will help the company to better serve innovative customers around the world.

Future prospects: 1) Rich formulation pipelines drive growth: The company's formulation business is accelerating the “multi-variety” development strategy. As of 24H1, the company already has more than 120 formulation varieties and 51 research projects. As the R&D pipeline is gradually approved for listing, the formulation sector is expected to usher in accelerated development in 25 years.

2) CDMO: D-end and M-end work together. In recent years, the company has continued to invest in R&D, D-side capabilities have continued to be strengthened, the number of active projects has grown steadily, and a “funnel-shaped” structure has gradually taken shape. At the same time, we are actively developing new molecular fields, and ADC CDMO capabilities are iteratively upgraded. As ongoing projects are gradually diverted backwards, performance contributions during the commercialization phase are expected to continue to increase.

3) APIs: Traditional business is steady, medical aesthetics and synthetic biology are increasing. As a leading enterprise in the domestic specialty API industry, we expect the original mature API business to maintain a steady development trend. At the same time, the company has increased investment in emerging businesses such as medical aesthetics and synthetic biology in the past two years. In January '24, the company officially established the Medical Aesthetic and Cosmetic Ingredients Division to continue to strengthen the upstream medical and cosmetic industry chain, supported by synthetic biology, chemical synthesis, peptides and other technology research and development platforms. It is expected to gradually contribute to performance flexibility over 25 years.

4) Focus on the elasticity of veterinary drugs. The company's APIs and CDMO divisions all have certain veterinary drug-related businesses. In the API business, veterinary drugs are mainly mainstream antibiotics, which are used in animal breeding and health care. At the same time, the company has rich experience in R&D and production of high-end veterinary drugs CDM O. Prices of some of the main varieties in the veterinary medicine sector have fluctuated greatly due to supply and demand. Prices of most varieties of 24Q2-Q3 have rebounded after bottoming out, and the supply side is expected to be optimized later as backward production capacity is gradually cleared. At the same time, the current pig cycle is picking up to a certain extent, and demand side veterinary drug usage is expected to rise marginally, and the company's veterinary drug business is expected to rise steadily.

Profit forecasting and investment ratings

The company's API business is growing steadily, and the new business direction is gradually gaining strength. The CDM O sector is growing at an accelerated pace, and its share of revenue is gradually increasing. The active layout of the formulation business is expected to contribute to long-term growth. We are optimistic about the growth potential of the company's three major segments after new production capacity is implemented. We expect the company to achieve revenue of 124.8, 140.7, and 16.06 billion yuan in 2024-2026, up 8.73%, 12.81%, and 14.10% year-on-year, and achieve net profit of 11.4, 13.6, and 17.0 billion yuan, up 7.89%, 19.17%, and 25.19% year-on-year, corresponding to PE being 17, 14 and 11X in 24-26, maintaining the “buy” rating.

Risk Alerts

Risk of changes in the international trade environment. The company's current products include many export varieties, accounting for more than 40% of overseas revenue, and there is uncertainty about changes in the overall international trade environment and policy. If global trade frictions intensify further in the future, it may adversely affect the company's operations.

Industry competition intensifies risks: Currently, the competitive pattern in the market where the company's main products are located is relatively stable. If prices rise further and more competitors join the market in the future, increased competition may reduce the company's profit level; in addition, if additional production capacity is supplied in international markets such as India, it may have an impact on the prices of the company's related varieties.

Industry policy risks: Currently, centralized procurement of national pharmaceuticals and medical insurance negotiations are gradually being normalized. If the company's main pharmaceutical products fail to win the bid in national collection, sales of the company's pharmaceutical products at public medical institution terminals may be restricted, which will adversely affect the company's domestic market share and business performance.